Federal Reserve continues to support global financial markets

Anthony Okolie recaps the biggest news of the day including the latest COVID-19 developments, followed by a conversation with Scott Colbourne, Managing Director, Global Active Fixed Income, TD Asset Management, about the Fed’s pledge to keep rates near zero to support the economy through the coronavirus pandemic.

- Hello and welcome to Moneytalk's COVID-19 daily bulletin for Wednesday, April 29. I'm Anthony Okolie. In a few minutes, we'll be speaking with Scott Colbourne, Managing Director of Global Active Fixed Income, TD Asset Management, about the latest Fed rate results. But first, a quick wrap of today's headlines.

The US Fed kept interest rates unchanged and pledged to keep rates near zero until they are confident the economy is back on track. The US economy contracted for the first time in nearly six years between January and March as the coronavirus crisis put the business world in a chokehold. America's first quarter GDP fell at a 4.8% annualized rate, the worst drop since the 2008 financial crisis.

McDonald's Canada says they will start importing beef as Canada's beef supply chain struggles to meet current demand. The change in policy comes after temporary closures at two Alberta meat plants due to a COVID-19, which have resulted in beef shortages across the country.

More bad news for Boeing. The aircraft maker reported a $1.7 billion loss in the first quarter and is cutting 16,000 jobs. That's as the airline industry struggles with the impact of the coronavirus.

Speaking of which, is this the future for air travel? Emirates Airlines is testing passengers for COVID-19 on flights from Dubai before boarding. The test checks for antibodies, which can show if someone has been exposed to the virus. And that's a wrap of today's headlines.

Next, my conversation with Scott Colbourne. Scott, what's your reaction to the Fed announcement? Was there anything specific that you were looking for?

- Today-- we've had a tremendous amount of stimulus over the last month from the feds. Today was supposed to be sort of a tweaking announcement, a sort of reassess and regroup from the Fed. So on that basis, it really wasn't a surprise to see the Fed on hold.

Maybe a little surprise that they didn't tweak some of the programs for better efficiency, or maybe to announce a bit of guidance on forward guidance. But beyond that, no surprises.

- And you mentioned some of the programs that they've instituted. Have they worked so far? And what have they done?

- Yeah, When you think of what central banks have been doing over the last little while, they've really been focusing on making the markets work in this stressed environment. It's really addressing the emergency situation.

So it absolutely has worked. The Fed has bought over $2.2 trillion in treasuries as well as mortgage backed securities. They haven't started the corporate bond buying program. Neither has the Bank of Canada or the provincial bond buying program. But it's relieved the stress in the credit markets and definitely allowed for the efficient operation of the markets right now.

- And what's been the reaction by the bond market to all that's been going on?

- It's very positive. Markets are functioning. The corporate bond market is open for corporations to buy.

We've definitely seen interest rates quite low. They've done what they've had to do. So net-net, from a financial liquidity point of view, central banks that have done it, basically they're giving us support for the financial markets.

Essentially, don't bet against us, whether it's the Fed or other central banks. They're really telling you, we've got your back here. It doesn't mean we're addressing the solvency or the health issues associated with COVID, but we're making sure that the markets are working efficiently.

- What are some of the headwinds going forward?

- It's just a tremendous amount of uncertainty, and that means challenges on employment, investment from the businesses. Certainly, we don't have a great visibility on what's going to happen on the health side of things. So that's a challenge.

And before we went into this pandemic, we were dealing with credit as a late cycle issue, right. So we are definitely going through a cycle here where we're going to see defaults, obviously sector specific. For example, energy is being challenging, and you're seeing defaults in that sector right now.

So that is definitely a headwind, that credit cycle, and the high degree of uncertainty. So that's going to be something for investors to grapple with.

- For investors, why is it important that they have a diversified portfolio that includes bonds?

- Well, bonds are a shock absorber in stress, and it did its job during the this challenged environment. So we always need fixed income in our portfolios, and there's different types of fixed income. Government bonds provide one sort of support, especially in this environment.

But as we come out of this emergency setting, credit is definitely a welcome part of your portfolio, whether it's investment grade bonds, which central banks are buying, or whether it's going out further up the risk curve, for example, into high yield, which is offering very attractive levels. So for the first time in a long time, you're really being compensated to take credit risks. So yeah, absolutely, it plays an important part of your portfolio.